Last June, Jamie Dimon, chief executive officer of JP Morgan, America’s (and the world’s) largest bank, warned that an economic “hurricane” was “coming right out there, down the road.” Other CEOs and analysts agreed; Elon Musk, who was still considered a good money maker at the time, had a “super bad feeling” about the US economy.
However, economic activity in the US remained strong: GDP grew 3.2 percent in the third quarter of 2022, and employment rose by 223,000 in December. By November, Goldman Sachs was forecasting that America would “escape the 2023 recession,” and Joe Biden’s press secretary, Karine Jean-Pierre, was declaring that there were “no meetings or anything to prepare for a recession” in the White House.
At the same time, some of the classic indicators of an imminent recession remain. Investors in financial markets are still charging more to lend America short-term than long-term (the US Treasury “yield curve” is “inverted”), a situation that has been an accurate indicator of every recession in America for more than 50 years Years. And the underlying fact is that the US, like other countries, is enduring high inflation, which its central bank is trying to curb with higher interest rates. Where, then, is America’s absent recession – and will it ever materialize?
The first to be consulted is Milton Friedman, who wrote in 1961 that the effects of monetary policy are “long and variable”: interest rates may take a few years to make themselves felt throughout the economy. But he’s been dead 16 years, so I asked Stephen Miran, a former senior economic policy adviser to the US Treasury Department and co-founder of wealth manager Amberwave Partners, for his opinion. Miran said there were signs of a slowdown in the near term: An index that tracks orders, hiring, output and other factors in the services sector (which makes up two-thirds of the US economy) contracted in December for the first time since March 2020.
But the sector Miran is watching most closely is the US housing market. He said the recession is being held in check in housing and it is the housing market that will be the catalyst for the downturn if it happens.
“Economists like to say that housing is the business cycle,” he explained, because it represents an enormous amount of spending – not just for houses themselves, but for all related goods and services (moving, furnishings, decorating, insurance, legal, finance) and employment creates spending. The construction sector alone provides eight million jobs. “So if you get a 10 percent increase in employment in that sector, which is very likely in a large housing demand slump, that’s easily 800,000 jobs.” As each of these new unemployed spends less, each layoff adds another ” Loss of Demand,” which amplifies the effect: “You could easily lose two to three million jobs from the housing market decline. This is a real recession.”
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Miran thought the reason it hasn’t happened yet is because it now takes over a year longer to build a home from start to finish in the US thanks to the global supply chain mess caused by the pandemic. Housing starts have declined, but layoffs will not arrive until all of the homes currently being built are completed.
But maybe they won’t either: it could also be that employers, having gone to all the trouble to hire people in a tight labor market, will hold on to all those workers for as long as they can. That “work shortage” could be exacerbated by the Infrastructure Investment and Jobs Act, Miran says, through which the US government plans to spend tens of billions on construction over the coming years. It’s a “plausible theory,” he argued, that enough employers would switch from building houses to building roads to keep the layoffs from happening.
Does this mean America could fund its way out of a recession? Unfortunately not. In an economy with the lowest unemployment rate since 1969, “there is plenty of dry match for inflation”. The basic logic of the business cycle is that a recession is necessary. “If we see the economy pick up again, there’s a good chance we’ll see inflation pick up again,” Miran said. The Federal Reserve would then be forced to raise interest rates to combat this inflation, and in doing so would induce a recession anyway.
“Historically there has never been a case where inflation has stalled without a material rise in unemployment – by which we mean a recession,” Miran said. He added that a delayed recession could be worse as the other factors that kept the economy humming – like household savings during the pandemic – will have dried up.
One could argue that a delayed recession would also be bad for the incumbent government. Democrats could be better off if a sharp but brief downturn hits now, and they’d have time to deal with that before the next campaign begins. By committing to a huge public spending plan in 2021, Joe Biden has set the stage to halt the downturn – but it could materialize when it’s least welcome.
[See also: We can’t ignore the pensions time bomb]